Can You Have Margins in an IRA?

by Leslie McClintock

Congress intended the IRA, or individual retirement arrangement, to be a long-term savings vehicle to help workers ensure their own financial stability in retirement. It envisioned a three-legged stool, including workplace pensions, personal savings and Social Security to provide a foundation for stable retirement income. As such, Congress did not design the IRA to be a tool for financial speculation or inordinate risk-taking. While IRAs generally allow workers more investment choices than 401ks and other workplace retirement plans, you cannot take a margin loan against assets in an IRA.

Margin Borrowing Basics

A margin loan is simply money an investor borrows from his brokerage firm, using the securities in his brokerage account as collateral. You can use the loan proceeds for any purpose you like. If you use it to invest in the same securities you are borrowing against, you magnify potential returns. But you also magnify potential losses, as well.

Margin Requirements

Generally, you have to keep a dollar in your account for every dollar you have borrowed. If the stocks in your margin account fall, you will get a "margin call" from your broker, and have just a few days to either pay down the loan, or commit more funds to shore up your margin account to get it back to 50 percent of the total. If you can't raise the cash, the broker may sell as much of your stake as neccessary to pay off the loan. If this were an IRA, your entire account could get unraveled very quickly -- leaving you with no IRA, a huge tax bill and penalties -- and very possibly an outstanding margin loan balance to show for it.

Prohibited Transactions

IRA rules specifically prohibit IRA owners from using IRA accounts as collateral on a loan. Most brokers would not allow you to open a margin account with your IRA to begin with. If you do pledge your IRA as collateral on a loan, the Internal Revenue Service may disallow your entire IRA, forcing you to pay income taxes on the entire amount in your IRA, plus an additional 10 percent penalty, if you are under age 59 1/2. You also cannot lend money to yourself or a relative from your IRA, purchase real estate that you live in or planned to live in, purchase alcoholic beverages, most precious metals or jewelry or other collectibles.

Alternatives

Although you cannot borrow against an IRA, you can open a "self-directed" IRA to invest in a small business, farm or other alternative investment that you can control yourself. You have to comply with certain complex restrictions, however, to avoid running afoul of IRS-prohibited transaction rules. If you want to borrow money, you may also be able to take a loan against home equity, or against the cash surrender value of a permanent life insurance policy. If your employer allows, you may also be able to borrow against your 401k. Each option has potential consequences on your long-term savings picture, however.